By The Pound

By Max Li | Published: June 29, 2011

I recently finished the book Stumbling on Happiness by Daniel Gilbert. He pointed out an economic fallacy that really struck me while reading the book: our focus on relativity. One of the examples he gives is quite illuminating. Most people would drive to the other side of town to get 50% off a $100 radio, but wouldn’t drive across town to get the same fifty dollars off of a $100,000 car despite the fact that the absolute savings is equal. This got me thinking about other non-optimal economic behaviours that I (and most likely others) exhibit.

Let me illustrate with a fallacy that I recently caught myself committing. One challenge that was presented to me at the beginning of this work term was that I needed to shop for and cook food (which I had never really needed to do before). Typically, during a shopping trip, I examine every possibility and then decide on the best one. For example, if I were to decide that I wish to buy pasta, I would look for the package of pasta that maximizes the nutrients and minimizes the price. One would think that this method is reasonable enough; in theory, it should produce something close to the optimal choice.

In order to accomplish this, I find it useful to examine the price per 100g (which is usually provided at most supermarkets). This is usually a strong indicator of which one I should buy. Yogurt which is $0.50 per 100g is likely my choice over yogurt that is $1.10 per 100g, unless the more expensive one is clearly and significantly better. Recently, while browsing for a loaf of bread, I was using this method to gauge which package to buy. Then it hit me; I was doing it all wrong!

No, it’s not that price per pound isn’t a crucial factor in a lot of cases; it’s just that it’s totally irrelevant in that particular situation. You don’t eat bread by the pound; you eat it by the slice. Thus, two loaves of bread with the same number of slices but different weights are functionally equivalent (all other factors being equal). Once I realized this, I compared the nutrients of the two loaves of bread I was considering and made my decision based upon that. (In case you’re interested, I ended buying the lighter one because it had the same amount of calories per slice but apparently far more vitamins, fibre, etc.)

So what is to be learned here? First, humans have little prowess in economic optimization. Second, and probably more generally applicable, if you are going to optimize aspects of your life (there are reasons you may not want to, but I’ll leave that for another post), you should make sure the objective function (i.e. that which you are looking to maximize or minimize) is the correct one. In my case, I was trying to minimize price per pound, not realizing that weight is not a very useful unit of measure in regards to bread.

This is only one of many economic fallacies that I (and others) practice. I think by becoming aware of them, we can reduce our susceptibility to such non-optimal behaviour.